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The 2002 Provincial Budget Address
Madam Speaker,
Members of the Legislative Assembly.
>A year ago I presented the 2001 Budget the theme of which was
Keeping the Balance in Uncertain Times. At that time there were
troubling signs that the strong economic growth Canada had been
enjoying in previous years was coming to an end. I noted that, "The
distinct slowdown in the US economy, coupled with severe reductions
in world stock markets have caused a serious reassessment of the
economy."
Madam Speaker, using the best information available at that time we
developed our Budget, predicated on this uncertain economic
outlook. But no one could have foreseen the tragedy that overtook
the world on September 11, 2001. This heinous act of terrorism went
beyond all known bounds of humanity.
Casting our thoughts back to the events of that day and the months
following, let us not forget the uncertainties and impacts resulting from:
- one, the immediate closure of airspace to the US and diversion
of traffic to Canadian terminals;
- two, the obstruction to trade across the US border;
- three, the demands for and response to the need for increased
security at airports and strengthened border controls;
- four, the decisions to target military forces on Afghanistan; and
- five, the uncertainty surrounding the success of these measures.
It now looks as though the direct threat that was posed to our society
has been successfully countered, although the effort continues. Also,
the latest news points to encouraging signs that the North American
economy is improving. However, the events of September 11
caused an immediate loss of air travel and a drop in business and
consumer confidence. In the months following, the global economic
climate became very clouded.
Public Input
Madam Speaker, this has been a challenging Budget to prepare. I
have, however, been helped in this task first, by my colleagues and
second, by the advice of those who wrote and spoke to me during its
preparation. As in previous years I invited members of the public and
interest groups to advise me on their priorities, concerns and thoughts
on the Budget. I am always encouraged by the interest demonstrated
by many in the finances of the Province and their concern for the
economic future of Prince Edward Island.
We listen and learn from all the advice from every quarter concerning
the Budget.
Madam Speaker, budgets are inherently about the efficient and
effective use of the taxpayers' hard-earned dollars and as such they
must reflect the needs of the people of the Province.
I must point out, however, that there are large elements of our fiscal
situation that are beyond our control. Approximately 40 per cent of
our revenues come from federal sources and hinge on the national
economy, coupled with decisions and actions of the Federal
Government. I will speak more of this later, but it will become evident
through this discourse that the uncertainties surrounding federal
transfers are the main reasons why this Budget has been so
challenging.
Economic and Fiscal Performance
Last year's Budget anticipated that the Canadian and Provincial
economies would grow more slowly in 2001 compared to previous
years. In fact, the GDP for Canada in 2001 expanded by only 1.5
per cent in constant dollars, compared to 4.4 per cent in the previous
year. For Prince Edward Island we estimated growth of 1.3 per cent
in 2001, which compares to 3.0 per cent in the previous year. The
reduced pace of economic growth also slowed employment gains
from the record 5.2 per cent increase we enjoyed in 2000, to 2.2 per
cent in 2001.
Madam Speaker, I am happy to be able to report that notwithstanding
the slower pace of growth, there were approximately 66,000
Islanders employed in 2001, which is an all time high. The expansion
in employment meant that an additional 1,400 persons were working
last year. Unemployment fell to a low of 10.2 per cent in June 2001
resulting in an annual average of 11.9 per cent, the lowest since 1981.
Nationally, the slowing economy prompted the Bank of Canada to
lower interest rates ten times from a high of 6 per cent to 2.25 per
cent. By years' end interest rates were at their lowest in 40 years.
This aggressive reduction in interest rates encouraged a sharp increase
in consumer spending, with car sales being a major contributor.
Further, during 2001 energy costs fell sharply, following their
escalation last year.
Reflecting on the economic performance of the Province during 2001,
it may be recalled that our main concern at the outset of the year was
the embargo on potato shipments to the United States. Working
closely with the potato industry, the Province showed its determination
to prove that the potato wart problem was isolated and we pressed
the Federal Government to negotiate with the US Government to lift
the embargo on shipments. Thanks to these efforts, our farmers were
freed from the embargo in early 2001.
Island farmers faced another serious problem in the subsequent crop
year as near-drought conditions in the growing season resulted in a
very small harvest, particularly the potato crop. The volume of
potatoes was 39 per cent below the 2000 crop. This in turn caused
potato processors to reduce the level of their production. Fortunately,
improved potato prices, combined with the support programs
provided by the federal and provincial governments to potato farmers
in early 2001, permitted farm cash receipts to expand to $335.6
million in 2001, up from 2000 by 4.3 per cent.
The trade embargo hurt our exports, which were down by 3.7 per
cent in 2001, following dramatic growth in previous years. Tourism
did relatively well in 2001 going against the regional trend, with $310
million of expenditures, up by 10.7 per cent from last year.
Lobster landings reached $100 million in 2001, an all time high,
although we did note that fish volumes were down somewhat.
Retail sales reached a record level of $1.3 billion, expanding by 3.9
per cent from the previous year. This was aided by the extremely low
interest rates.
Madam Speaker, insofar as the provincial economy goes, our forecast
for 2001 at Budget time now appears to be reasonably on target.
A fuller explanation of the economy is contained in Budget Paper A.
I will now turn to the fiscal outcome for the year 2001-2002.
Madam Speaker, the budgeted revenues for 2001-2002 were
forecast to expand by only 1 per cent from their forecast levels of
2000-01. I am happy to able to report that revenues in total have
exceeded budget by $14.5 million.
In the 2001 Budget we had estimated that our own source revenues
would be $545.8 million in 2001-2002. These are revenues that are
derived from provincial taxes and other local sources. At $549.9
million, they are essentially on target.
Madam Speaker, the Federal Government provides provinces with
revised estimates of their equalization entitlements twice a year. These
federal estimates fluctuate widely from estimate to estimate with the
result that we have learned to use our own information in an effort to
more reliably predict our revenues and plan for the future. Only as
recently as February 28, 2002 we were informed of significant
differences in the previous numbers the Federal Government provided
which contrasted with our forecast revenues. As it now stands, our
original estimates are off by only 2.6 per cent.
On the expenditure side of the account, our Government made it clear
in late 2001 that efforts were needed to reduce the pace of spending,
in light of the evident slow growth in revenues. Following the second
quarter review, line departments responded by reducing spending by
$11 million. We also put in place a policy to freeze hiring with
exceptions for hiring for essential services only.
Expenditures are now forecast to be $986.7 million, which exceed the
original Budget by 2.8 per cent. I might add that this represents an
increase of only 2.4 per cent from the spending limits in the previous
year. Part of this increased spending is the result of the acceleration
of the East Prince Health Facility construction.
In view of the additional work on the Health Facility, involving $19.4
million of expenditures in 2001-2002, the overall forecast is a deficit
of $14.5 million. I am happy to report that, exclusive of the
Province's investment in the East Prince Health Facility, the projected
surplus for 2001-2002 is $4.9 million. This compares to a budgeted
surplus of $11.6 million for the year. The difference of $6.7 million
represents less than 1 per cent of our total budget.
Madam Speaker, I can assure you that this Government has been
vigilant in its efforts to keep the lid on spending and in any other year
the limited expenditure expansion that was allowed would have
resulted in large surpluses. Additional investments were provided for
priority reasons only.
What are these priority areas? Government's priorities are the
priorities of Islanders. Health costs are higher than Budget by $13.8
million, largely in view of the work on the East Prince Health Facility
which, as I noted, is moving ahead faster than had been anticipated.
The Province acted on an opportunity to assist in a substantial
expansion of the aerospace sector in Slemon Park, increased funding
of $500,000 for Tourism Marketing and completed additional
highway maintenance. Further, we also had to deal with the
unanticipated School Boards deficits of $1,080,000.
Madam Speaker, this was the nature of our additional spending in
2001-2002. I would like to emphasize that when we complete our
budget, we make our best estimates based on all available
information. Actual results will vary from these estimates depending
on events and circumstances that occur throughout the year.
Variances from budget are not unusual and in fact can be expected.
Economic Outlook
I should now like to turn our attention to the future.
Fortunately, there are some preliminary indications that the economic
slump may have bottomed out. The latest economic statistics on the
American and Canadian GDP indicate that the fourth quarter was not
as weak as had been initially anticipated. More recently, the
Governor of the Bank of Canada declared that the recovery is
underway.
Madam Speaker, it would be imprudent to budget in anticipation of
a major economic improvement in view of the present uncertainties.
We hope that there will be progressively better news on the economy
as the year unfolds, but the strength of the recovery is still the subject
of speculation at the moment.
The December 2001 Federal Budget forecast that the national
economy would expand by 1.1 per cent in 2002 and 3.9 per cent in
2003, following growth of only 1.5 per cent last year. For Prince
Edward Island our forecast is for the economy to grow by about 1.2
per cent this year.
The important point to bear in mind is that growth rates in 2001 and
2002 are very modest by comparison to the pace of growth that we
had been experiencing from 1996 to 2000. I might note that as
recently as October 2000 the Federal Government was anticipating
sustained economic expansion of 3 to 3.5 per cent per year in 2001
and 2002. The fiscal consequence of the reduced rate of economic
expansion means that our flexibility in 2002 is somewhat
compromised.
Fiscal Outlook
Madam Speaker, we now believe that the slow level of revenue
growth that occurred in 2001-2002 will turn into a decline in 2002-2003, with resulting difficult fiscal consequences. The Budget for
2003 shows that revenues will be less than the previous year by $3.8
million.
The main reason for this situation is a decline of federal revenues by
$34 million in 2003, from our forecast revenues in 2002.
By contrast, our own-sourced revenues, generated from the taxes we
receive on sales, personal income and property are expected to grow
with the economy.
Federal revenue performance is weak for a variety of reasons, and
there is added uncertainty in the coming year over exactly what can be
expected.
Madam Speaker, Members may recall that in January of this year
provinces were unexpectedly informed of the misallocation of federal
income tax to some provinces that resulted from a federal accounting
error in the administration of capital gains tax from Mutual Fund
Trusts. We were informed that this resulted in an estimated
overpayment of Equalization to us of some $6 million. Madam
Speaker, we still have received no indication of how this will impact
on our Equalization in the coming year. In the 2001 Federal Budget
the Government of Canada committed $2 billion to an infrastructure
program. Madam Speaker, we still have no information on how this
is to be distributed although we are committed to working with our
federal counterparts. Most of our regional economic development
agreements have now expired, but Madam Speaker, we still do not
know when and by how much they will be renewed.
The population numbers from the 2001 Census have just been
released, and Madam Speaker, they also have potentially large
impacts on major federal transfers.
On top of these challenges, all provinces continue to have serious
disagreements with our federal friends over the ceiling on Equalization
and the inadequacy of the CHST transfer. I should note that in 2001
I appeared before both the House of Commons Finance Committee
and the Senate Finance Committee to explain why the Equalization
program is deficient. All Provincial Premiers and Ministers of Finance
have called on the Federal Government to remove the ceiling on
Equalization and to strengthen the program, and to raise their transfers
in support of Health, Education and Social Services, through the
CHST transfer.
More details on these concerns can be found in Budget Paper B.
Madam Speaker, our CHST cash in 2002-2003 will be about $89
million which is an increase of approximately 2.8 per cent over last
year, however, our expenditures on health are growing in excess of 7
per cent per year. CHST funding is still below the level of support we
received some eight years ago in 1994-95. We estimate that our
Equalization payments will be considerably below their 2001-2002
level and that calculation is highly uncertain. Still, the Federal
Government insists on applying a ceiling to payments. In addition,
other federal transfers are clouded in uncertainty.
Madam Speaker, I trust that Members of this House and the public
will understand the issues that confront the Government in the
preparation of this most challenging Budget.
The Year Ahead
In view of the weak revenue picture for 2002-2003 we must budget
prudently while maintaining our commitments. Although we will
depart from our goal of a balanced budget for 2003, we have every
expectation to return to a balanced situation in 2004.
As we announced earlier this year, when we began the Budget
exercise we realized that the shortfall in revenues and the underlying
growth in expenditures created a projected deficit of an unacceptable
level. This was our starting position.
Through the course of developing this Budget we have acted to pare
down spending drastically. In the course of the Budget exercise we
adhered to the principle that delivery of essential services will
continue, and that we recognize our responsibility to our employees
and will honour the salary settlements established through contract
negotiations recently concluded.
In responding to the challenge of the difficult times, we have set overall
spending in 2002-2003 at a level only 1.4 per cent higher than the
forecasted expenditures of the previous year.
The overall excess of revenues and expenditures in the coming fiscal
year will produce a deficit of $11.6 million before the Province's
investment in the East Prince Health Facility and a deficit of $28.8
million subsequent to the investment. Madam Speaker and Members
of this House, this represents a significant improvement from the
deficit that we faced at the start of the Budget exercise. Generally,
governments will run deficits during economic slowdowns because
revenues are lower than normal. When this occurs, it is referred to
as a cyclical deficit which governments believe will be eliminated as
economic conditions improve.
Tax Measures
Madam Speaker, we have resisted general tax increases with the
exception of two tax measures which I will announce in this Budget.
As of midnight tonight, the Health Tax will be raised by $5 per carton
of 200 cigarettes and proportionate increases will be raised on related
tobacco products.
This measure follows similar steps in other provinces, the primary aim
of which is to act as a further disincentive to smoking. Prince Edward
Island will be among the forefront of provinces aggressively acting on
cigarette smoking as we previously raised the tax in April and
December of last year.
The tax on gasoline will increase by 1 cent per litre as of midnight
tonight. An analysis of the most recent prices across Canada shows
Prince Edward Island prices to be among the lowest in Canada, lower
than the Canadian average and the lowest in Atlantic Canada.
Priorities for 2002-2003
Madam Speaker, few could disagree that the development of this
Budget was undertaken in an extraordinary period of global
uncertainty.
Notwithstanding the problems that beset the economy, the most
difficult aspect of this has been the volatile nature of the revenues
delivered through the federal system. This not only includes
Equalization and CHST but also the federal share of development
funds, infrastructure monies and the Personal and Corporate Income
Tax , all of which are administered federally. The ability of the
federal system to provide reliable and accurate forecasts of our
receipts is sadly lacking.
Bearing in mind the overall revenue decline within which we are
working in 2002-2003, some reductions in spending have been
necessary.
Overall, expenditures have been reduced by $39.5 million in 2002-2003 from the Status Quo Budget. This represents a reduction of 4
per cent in overall spending. The reductions come from a wide
variety of programs and services across all departments.
The largest reduction is in our Highways Budget from which $12.5
million in planned capital spending has been delayed.
The second most significant reduction is in the Education Capital
Budget, which is reduced by $5.2 million. The construction of the
Summerside Intermediate and Bluefield Phase II schools will be
delayed, however, our Government is committed to the completion of
these projects as soon as revenues permit. I must emphasize,
however, that other school construction programs will proceed as
planned. The Kinkora School is proceeding as scheduled. I should
note that we have already completed the Parkdale School addition,
the Summerside/Miscouche French School and the West Prince
French School. The Miscouche Consolidated School addition project
is also well underway.
We are holding fast to our commitment to bring MRI and Linear
Accelerator services to the Province. Our Government will make
investments of $9.6 million in the fiscal year to support their capital
costs as well as $1.6 million to fund the start up costs of these
important services. We have already recruited a highly respected
radiation oncologist to develop this much needed service.
We will also begin the planned expansion of the O'Leary Community
Hospital, budgeted at $1.1 million this year.
We have introduced a voluntary workforce adjustment program in an
effort to reduce costs and streamline the delivery of services. The
projected savings of $3.75 million will assist in the renewal of the
Provincial Government workforce.
Madam Speaker, I could go on and provide more details of the
reductions to our spending plans that were necessary this year but
would prefer to leave this to the respective departmental Ministers
who are more knowledgeable than I am on their programs.
Improved Services
Madam Speaker, I would like to discuss the large improvements in
our public service that our Government continues to achieve.
Last year more than 45 new registered nurses began work here.
Overall we now have 1,411 nurses, compared to 1,364 a year ago.
We were able to recruit 8 family physicians and 12 specialists. During
2001, each of our Health Regions were awarded maximum
accreditation status by the Canadian Council on Health Services
Accreditation. We have provided an additional $2 million to
provincial drug programs, largely the Seniors and Financial Assistance
Program. We have increased funding to private nursing homes over
the past four years and will increase funding by a further $480,000 in
2002-2003.
An additional $1.5 million is provided to home and palliative care, and
a further $1.5 million for the Disability Supports Program.
Madam Speaker, the Government is resolute in its desire to carry
forward its commitments despite the difficult financial pressures that
exist. The largest investment in 2002-2003 is the East Prince Health
Facility whose pace of construction is ahead of schedule. We have
budgeted $21 million for this project, which we now expect to be near
completion by April 2003.
Education and training are the cornerstones of the future development
of the Province. Our Government has maintained 33 teaching
positions despite declining enrollments. During 2001-2002, initiatives
were taken to improve literacy in both French and English. Last year
was the second year of the publicly-funded community based
kindergarten program. Significant investments were made by the
Province to support facilities and students at Holland College, UPEI,
the Atlantic Veterinary College, and the UPEI School of Nursing.
This Budget allows for those continued investments.
Madam Speaker, the agriculture and food industry of the 21st century
will be transformed significantly by ongoing developments in science
and technology, the adoption of new economic opportunities from
innovative agriculturally-based products, and growing consumer
demand for safe, high quality products produced in an environmentally
responsible manner. Helping new and existing producers acquire the
skills, knowledge and tools they need is a priority of this Government.
FarmNet, a new web-based service, is being developed with the
involvement of all sectors of the industry as a long-term, broad-based
and multi-faceted approach to connectivity, skills development and for
integrating information and communication technology into new and
existing farm business practices.
Over the past three years under the Agriculture and Environmental
Resources Conservation program, a total of upwards of $6.5 million
was provided for on-farm conservation projects. Given the success
of this three-year initiative, a new program will be developed to
improve the sustainability and productivity of agricultural operations.
The Department of Agriculture and Forestry is also working with
several interested organizations to examine options for a Model Forest
program for Prince Edward which would bring people together to
create a shared vision for Island forests and develop strategies to
enhance the many timber and non-timber benefits they provide. To
this end, the Department is also working closely with the Public Forest
Council to increase awareness of the Island's public forest lands and
the non-timber potential of these lands.
Madam Speaker, our drinking water is one of our most precious
assets. Last year we committed $270,000 to a long-term Drinking
Water Strategy. This year we are committing $382,000 to protect
our water for present and future generations.
The Province will sustain its commitment of $250,000 per year to the
Lobster Science Centre at the Atlantic Veterinary College and
provide additional resources for further research into this, one of our
most important primary resources.
During 2002 the provincial Department of Fisheries, Aquaculture and
Environment in partnership with the PEI Aquaculture Alliance and the
Aquaculture Association of Canada, will host Aquaculture 2002, the
largest annual event of its kind in Canada.
Communities
Strong and vibrant communities contribute to the overall success of
our Island economy. Our Government continues to promote and
invest in economic initiatives to build and sustain our communities.
Notre gouvernement continue à supporter et investir dans des
initiatives économiques pour soutenir le développement de nos
communautés. The Community Development Bureau will partner
with Island communities to develop local projects.
Conclusion
Madam Speaker, the theme of this budget is "A Balanced Response
to Difficult Times". It is an honest assessment of the impact on the
Province's economy and fiscal position of the economic downturn that
overtook the nation in 2001. It is a temporary but responsible
departure from our long-standing goal of balancing our accounts,
reducing taxes and lowering the debt.
The legacy we leave our children cannot be debt covered by deficits.
We know we must invest in the future and not allow short-term
challenges to take us from our long-term goals.
The future of Prince Edward Island is dependent on the dedicated
people who share our commitment to make this province a better
place to live.
This Budget keeps the Province on its course notwithstanding the
difficult times that we are passing through.
Madam Speaker, we will continue to take a balanced approach and
focus on clear public priorities which will lead to balanced results. I
believe this budget clearly articulates that approach and focus.